Category Archives: Taxes

Tax Relief Provided by the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020, not only provides significant financial relief to individuals and businesses, but it also contains tax law changes to help everyone coping with Coronavirus. Below is a summary of the key provisions impacting individuals and businesses.

Individual Provisions

Waiver of 10% early distribution penalty: The additional 10% tax on early distributions from IRAs and defined contribution plans, such as a 401(k), is waived for distributions made between 1/1/2020 –12/31/2020 by a someone who (or whose family) is infected with or is economically harmed by the Coronavirus.
Waiver of required distribution rules: Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans, such as 401(k), and IRAs are waived.
Charitable deductions: Individuals will be able to claim a $300 above-the-line deduction for cash contributions made to public charities in 2020. Also, the limitation on charitable deductions based on adjusted gross income doesn’t apply to cash contributions made in 2020.
Break for nonprescription medical products: Beginning in 2020, amounts paid from HSAs and MSAs are to be treated as paid for medical care even if they aren’t paid under a prescription plan. The same applies to reimbursements from Flexible Spending Arrangements and HRAs made in 2020.

Business Provisions

Employee retention credits: Eligible employers can qualify for a refundable credit against their portion of the Social Security payroll tax for up to 50% of certain wages paid to employees during the COVID-19 crisis.
Delay of employer payroll tax payments: Employers can defer payment of the employer portion of Social Security and RRTA taxes and self-employed individuals can defer payment of certain self-employment taxes through the end of 2020.
Advance refund of credits for sick and paid leave: Employers, who paid qualified sick and family leave wages under the Families First Coronavirus Response Act (FFCRA), are eligible for an advance refund of credits against certain payroll taxes paid on those wages.
Changes to net operating loss (NOL) rules: For NOLs arising in tax before 2021, taxpayers can now carryback 100% of NOLs to the prior five tax years. Also, for tax years before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income, rather than the present 80% limit.
Temporary increase in the deductibility of interest expense: Businesses may increase the interest limitation from 30% to 50% of adjusted taxable income (ATI) for 2019 and 2020 and elect to use 2019 ATI in calculating their 2020 limitation. For partnerships, the 30% of ATI limit remains in place for 2019 but is 50% for 2020.
Bonus depreciation now available for interior building improvements: The CARES Act makes a technical correction to the 2017 Tax Law that retroactively treats a wide variety of certain building improvements as eligible for bonus deprecation, allowing for a 100% write-off.

For more information, contact your Bothell Accountant at Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, personal tax preparation & business tax preparation, and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kirkland, Kenmore, Mill Creek and surrounding areas.

Understanding Cash Flow

A healthy cash flow is an essential part of any successful business. Face it – if you fail to have enough cash to pay your suppliers, creditors, or your employees, you’re out of business! No doubt about it, proper understanding and management of your cash flow is a very important step in making your business successful. Despite what some may think, there’s more to it than just a fancy term for the movement of money into, and out of, your business checking account.

Inflows – Inflows are the movement of money into your cash flow. Inflows are most likely from the sale of your goods or services to your customers. If you extend credit to your customers and allow them to charge the sale of the goods or services to their account, then an inflow occurs as you collect on the customers’ accounts.

Outflows – Outflows are the movement of money out of your business. Outflows are generally the result of paying expenses. If your business involves reselling goods, then your largest outflow is most likely to be for the purchase of retail inventory. Purchasing fixed assets, paying back loans, and paying accounts payable are also cash outflows.

Cash flow is typically measured by analyzing the amounts of cash received versus the amount of cash paid out. The report most often used to look at where your cash comes from and find out where it’s going is called the “Statement of Changes in Cash Position (or “Statement of Cash Flows”).

If all is well, you will not be agonizing over the fact that the outflows are larger than the inflows!

For more information, contact your Bothell Accountant at Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, personal tax preparation & business tax preparation, and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kirkland, Kenmore, Mill Creek and surrounding areas.

Importance of Accountable Plans

If you often reimburse employees for job-related expenses they incur, accountable plans can offer a significant measure of safety. Reimbursements under an accountable plan aren’t taxable to the employee and (with the exception of meal and entertainment expenses) are fully deductible by the employer. For the accountable plan to qualify, reimbursements must be for job-related expenses that the employee would reasonably expect to incur, and the employee must provide substantiation and return any excess reimbursements within a reasonable period of time.

Consider this scenario: A courier business employees picks up and delivers packages using their own vehicles. The company’s reimbursements aren’t based on the employees’ actual expenses but instead, their commissions is split between wages and equipment rental (i.e., use of the employees’ vehicles). The employees aren’t required to submit mileage or expense documentation to the employer. The employees’ wages are reported on their W-2s and the expense reimbursements on their 1099-MISCs.

In this situation, since actual expenses aren’t reported to the employer, the reimbursements aren’t part of an accountable plan. As a result, the “reimbursement” must be included on the employees’ Forms W-2 and subject to employment taxes.

While this scenario involves a delivery service, the rules apply to all businesses. Although some exceptions exist, it’s best to either include the full amount in wages or require employees to submit detailed expense reports for reimbursement under an accountable plan.

For more information, contact your Bothell Accountant at Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, personal and business taxes, and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kirkland, Kenmore, Mill Creek and surrounding areas.

Tips for Paying Estimated Taxes on Income

Estimated tax is a method used to pay tax on income that isn’t subject to withholding. You may need to pay estimated taxes during the year depending on your sources of income. For example, income from self-employment, interest, dividends, alimony, rent, gains from the sales of assets, prizes or awards, may require you pay estimated tax. For Sole Proprietors, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your Form 1040 return.

As a general rule, individuals must pay estimated taxes for 2019 if both of these statements apply:

  • You expect to owe at least $1,000 of tax on your Form 1040, after subtracting your tax withholding (if you have any) and credits, and
  • You expect your withholding and credits to be less than the smaller of 90% of your 2019 taxes or 100% of the tax on your 2018 return. If you own a business, often calculating estimated tax on a quarterly basis is a better choice. We can help you determine the safest route to go.

With the passage of the Tax Cuts and Jobs Act, estimating income for 2019 may be more challenging than in the past. In these uncertain times, you need someone you can trust for timely and accurate advice. We are knowledgeable and available to help, so call us to schedule an appointment.

Estimated tax payments are generally due April 15, June 15, Sept. 15 and Jan. 15. The easiest way to pay estimated taxes is electronically through the EFTPS, however; you can also pay by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

For more information, contact your Bothell Accountant at Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, personal and business taxes, and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kirkland, Kenmore, Mill Creek and surrounding areas.

Expensing Assets Under the Tax Cuts and Jobs Act

Because of the Tax Cuts and Jobs Act (TCJA), taxpayers can now deduct 100% of the cost of most new or used tangible property, other than buildings, acquired and placed in service after Sept 27, 2017. The new law also made Section 179 expensing more favorable by allowing taxpayers to immediately deduct the entire cost of qualified property on an asset-by asset basis up to a maximum of $520,000 annually. This limit is reduced by one dollar for every dollar that the costs of all section 179 property exceeds $2,070,00 for assets placed in service beginning in 2018. The Act also consolidates various leasehold improvement categories into one category – qualified improvement property. Qualified improvement property consists of improvements made to the interior of nonresidential real property after the building was placed into service. Qualified improvement property is also eligible for Section 179 expensing.

Should you take 100% bonus depreciation or select Section 179 expensing? It depends! Here are several considerations to keep in mind when deciding between Section 179 expensing and 100% bonus depreciation:

  • Neither bonus depreciation nor Section 179 expensing affect Alternative Minimum Tax (AMT).
  • Bonus depreciation must be elected out of by asset class; Section 179 expensing is elected on an asset by asset basis.
  • Section 179 expensing is limited to taxable income; bonus depreciation is not limited by taxable income.
  • Bonus depreciation can create a Net Operating Loss (NOL), which can be carried back and possibly generate a refund from a prior tax year.
  • Section 179 expensing can control taxable income to maximize the new 20% Qualified Business Income (QBI) deduction or limit the new $500,000 business loss limitation.

Selecting between 100% bonus depreciation and Section 179 expensing will not only affect your taxes in the current year but also in a future year when the asset is sold. Contact us to discuss how this can impact you!

For more information, contact your Bothell Accountant at Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, personal tax preparation & business tax preparation, and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kirkland, Kenmore, Mill Creek and surrounding areas.

Tips for Individuals on Deducting Charitable Donations

The organization must qualify. Charitable contributions must be made to “qualified organizations” as provided by IRS Publication 526, Charitable Contributions. Remember, you can’t deduct donations to specific individuals or political organizations.

You must itemize. Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.

What you can deduct: You can deduct cash contributions and in most cases, the fair market value of most property you donate. Clothing and household items must be in “good used condition or better” to be deductible.

Receive something in return? If your contribution entitles you to receive merchandise, goods, or services, you can deduct the amount that exceeds the fair market value of the benefit received.

Pledges and payments: Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in May but paid the charity only $200 by year end, you can only deduct $200.

Recordkeeping: You must keep records of the contribution. Save a cancelled check, bank or credit card statement, or a dated/ written receipt from the charity with the amount of the contribution. For text message donations, keep your phone bill showing the receiving organization, the date, and the amount.

Donations made near year end: Include credit card charges and payments by check in the year you donate to the charity, even if you don’t pay the credit card bill or draft from your bank account until the next year.

Large donations: For contributions of $250 or more, you need more than a bank record. You need a dated/written receipt from the charity stating the dollar amount donated and whether the organization provided goods or services in exchange for the gift. If you donated large items, the receipt must include a description of the items and a good faith estimate of value.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Deducting Casualty Losses

Casualty losses can occur when there’s damage or destruction of your property caused by a sudden or unexpected event or natural disaster, such as theft, tornado, fire, hurricane, flood, or earthquake. The good news in what’s normally a bad situation is that in most cases, these losses are deductible.

Individuals deduct the losses as an itemized deduction. If your property is insured, you can’t take a deduction unless you timely submit a claim to your insurance provider. Rules for calculating the loss can be tricky, and differ based on the type of property and extent of destruction. In general:

  • For personal-use property and for property not completely destroyed, your loss is limited to the lesser of your adjusted basis in the property on the date of the casualty or its decrease in value as a result of the casualty, less any insurance reimbursement received or expected to be received.
  • For completely destroyed business or income-producing property, including rental property, your casualty loss is equal to your adjusted basis in the property, less any insurance reimbursement received or expected to be received.
  • For personal-use property, in addition to the limitations above, the first $100 of each incident of casualty loss is not deductible. The remaining amount of casualty loss is further reduced by 10% of your adjusted gross income.

Taxpayers in Presidentially Declared Disaster Areas have a choice of tax years for deducting related disaster losses – either the tax year in which the disaster occurs, or the immediately preceding tax year.

Each choice has its pros and cons and will vary based on your particular situation, so it’s important to get some help before you decide. Claiming the disaster loss for the year before the loss occurred saves taxes immediately, without the need to wait until the year after the loss occurred. On the other hand, taking the deduction in the year of loss may save taxes if you’re in a higher bracket that year. Lots to consider!

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.